TOP THREE NOT-FOR-PROFIT ACCOUNTING ACCOUNTS RECEIVABLE MISTAKES AND HOW TO AVOID THEM
1. Not Recording Receivables at all (using the Cash Method of Accounting) – Typically, Not-for-Profit organizations prepare their Financial Statements using the accrual method of accounting, or at the very least modified cash. Since these types of organizations are funded on a cost reimbursement basis to a large extent you want to get your financial statements as real-time as possible. If you are preparing invoices on a regular basis to funding sources, those invoices are more than just correspondence, they are accounting documents that should be entered into your accounting system. This will recognize your revenue at the proper time (when earned) and give you a more current Financial Report.
2. Recording the Entire Amount of a Grant as Receivable – Do not record the entire amount of a grant or contract as a receivable when the grant documentation is received. Just because you have a grant or signed contract in place for a certain amount of money, for the great majority of scenarios that does not mean that you are immediately owed that money. You have not earned it yet, so it is not a receivable. Typically, the grant you have in place promises you this certain amount of money as long as you have met certain conditions. Those conditions are normally that you have spent the money on approved expenditures types such as providing services or processing a type of pass-through arrangement to a service provider.
3. Not Recording Pledges – If your organization has fundraisers or pledge drives that create these “promises” of revenue, these pledges are just as important as your other contract or service-based receivables in generating financial reports. As you are planning future cash flow, these pledges should be recorded on your financial statements as receivables. If, for an historical reason, there is a pledge for which you know you will more than likely not receive, you can always exclude that particular amount from your receivable entry and disclose the reason in some type of documentation. When recording these receivable amounts, you may also want to consider creating a “Pledges Receivable” account for your Balance Sheet in order to segregate these amounts from your other service or cost reimbursement receivables.
